March 11, 2022 [asia financial] -Vietnam’s leading refinery appears to have missed out on a golden opportunity, slashing output during a global oil rally because of a lack of coordination among the project’s stakeholders.
Nghi Son refinery has the capacity to process 200,000 barrels of crude oil a day. But the site in northern Vietnam lowered the operating rate in January, eventually declining to nearly half of the capacity at one point in February.
Operations have apparently revived to about 80% capacity, but the situation was so dire the refinery came close to shutting down last month, state media reported.
State-owned energy group PetroVietnam owns Nghi Son with Kuwait Petroleum International and Japanese partners Idemitsu Kosan and Mitsui Chemicals. A cash crunch was reportedly the reason preventing the machinery from running at full force.
“PetroVietnam and the other three investors have a difference in opinion, especially when it comes to the financing and payment fronts,” said an industry source, adding the state energy group has refused to contribute funding to cover payments to lenders over unfavorable interest obligations.
That has forced the refinery’s joint venture to allocate working capital to loan payments, the source said.
As a result, there has not been enough operating funds to procure crude oil for processing, in turn forcing the facility to cut the operating rate.
Nghi Son, a $9 billion initiative, launched commercial operations in 2018, becoming the second refinery to serve Vietnam. It is one of the largest petrochemical projects in the Southeast Asian country thanks in large part to a collaboration with Japan.
PetroVietnam controls 25.1% of Nghi Son while Kuwait Petroleum International holds another 35.1%. Idemitsu and Mitsui Chemicals own 35.1% and 4.7%, respectively. The president of the venture was hand-picked by Idemitsu.
Furthermore, Japan is deeply involved on the financial end. The refinery received approximately $5 billion in project financing. About 60% of the funding came from Japan, with the state-owned Japan Bank for International Cooperation extending the bulk of lending.
Nghi Son is the sole refinery project that Japanese interests operate overseas. But it appears that PetroVietnam is growing increasingly frustrated with assuming financial burdens that have come with project delays.
Although Nghi Son has received generous tax incentives, the facility has sustained $3.3 billion in cumulative losses, according to the Vietnamese government. Aggregate liabilities add up to $2.8 billion.
Yet international crude oil prices have spiked as the world begins to reopen from the coronavirus pandemic. The Ukraine war has also boosted prices.
For a refinery, this is a prime chance to expand profit margins by selling high. A well-positioned operator would benefit from cheap petroleum contracts struck during the previous oil slump.
But Vietnam’s communist government, PetroVietnam’s only shareholder, has apparently failed to make its intentions clear, which has contributed to the confusion at the Nghi Son venture.
“They haven’t capitalized on the good opportunity, and the distrust between [Nghi Son’s] shareholders is mounting,” said the industry source.
Idemitsu, Japan’s second-largest oil refiner, invested heavily in Nghi Son expecting to take advantage of a growth market. Instead, the project has been mired in setbacks.
The company first signed on to the venture in 2008 in response to shrinking gasoline demand at home. Idemitsu dispatched about 200 employees to the refinery during the peak period around the time the facility went online.
But not only did the refinery suffer construction delays, the operation initially encountered lackluster market conditions. Idemitsu has booked more than 90 billion yen ($782 million) in impairment losses from the refinery.
Today, the diminished operations at Nghi Son have resulted in a gasoline shortage. The refinery is supposed to cover 35% of Vietnam’s demand for the fuel. Gas stations, mainly in the south, have suspended business operations or capped sales since early February.
However, there appears to be a light at the end of the tunnel. At the end of January, the four shareholders agreed through a state-mediated process to provide short-term financial support for Nghi Son.
An oil tanker arrived at the refinery toward the end of last month. The facility seems to have narrowly averted a complete shutdown, and the operator is apparently looking to reach full capacity in the next two weeks.
Risks still remain for Nghi Son. The refinery has to pay lenders twice a year, and the next due date looms in May. If PetroVietnam refuses to cooperate on payment, the venture will once again have to raid operating capital to service debt. In that scenario, the facility utilization rate could go south.
Nghi Son has yet to brief distributors about supply plans for May and beyond, according to local media.
Vietnam in recent years has experienced a series of high-profile issues relating to infrastructure. The Ho Chi Minh City urban rail project has been bogged down by late payments from a state agency. The situation caused the start of train services to be delayed by several years.
There are cases where Communist Party directives fail to reach organizations that are in charge of projects.
“When serious problems occur, it takes time to resolve them,” said an executive at a Japanese trading house.
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